Fri, 25 Feb 2000

Strengthening East Asia economic cooperation

By Li Tieying

This is the second of two articles based on a presentation at the Indonesian Institute of Sciences in Jakarta on Feb. 16.

JAKARTA (JP): China, though not directly involved in the East Asia crisis, was affected as well. Now, what lessons have we learned from the crisis?

In the first place, developing countries should be very careful when they open their capital markets.

China has yet to completely open its capital market and there are still strict capital management and control measures in many aspects. This is an important reason why China was not involved in this crisis.

But globalization and internationalization of production demands objectively that all countries loosen management and control over their capital markets and that financial liberalization be realized. China is no exception and will eventually open its capital market, especially after its entry into the World Trade Organization.

However, the world financial system cannot guarantee the security of international finance. The financial systems of developing countries are rather fragile and vulnerable to outside attacks.

Secondly, therefore, the capital market should be opened in an orderly manner and matching policies and measures should be adopted; a set of risk-prevention and early warning systems should be established.

Caution should also be taken with foreign debts and the scale of short-term foreign debts should be controlled.

For the most severely hit countries, factors beyond control of foreign debts and particularly the inability to repay the huge amount of short-term debts were the main causes of this crisis.

In China, the scale and structure of debts are within a comparatively safe scope, which is why a debt crisis has not taken place.

Third, the management of financial institutions should be strengthened and relations between the banking sector and the government should be straightened out.

In some countries in East Asia, the lenient, nontransparent and ill-managed financial systems heavily contributed to the large number of bad debts. China's experience shows that the large scale of policy loans lent to loss-making state-owned enterprises was a major reason for bad debts.

China's financial reform is now being conducted in an orderly way. The priority is to straighten out relations between the banking sector and the government, to strengthen the management of the banking sector while reducing intervention from government departments and to promote the marketization of the financial industry.

Fourth, new and high-tech industries should be the forerunner in the further adjustment of the industrial structures.

To reiterate, the problem of disproportion of the industrial structures in the East Asian region is an important reason for the financial crisis.

In the mid-1990s, a new round of adjustment of the world industrial structures, with information technology as the forerunner, unfolded, but East Asia lagged behind.

The production capacity of traditional labor-intensive industries is stagnant in East Asia and recent years has seen the trend of insufficient domestic demand and saturation of the consumption market. An economic recession would easily take place without the pioneering of new industries and a new consumption market.

China is a big industrial country with a sound new and high- tech foundation. We cannot wait for industrial transfer of other countries and must take initiatives to increase input in science and technology, to develop new and high-tech industries, to promote industrial upgrading and to reduce basically the chance of the happening of financial crises.

The year 1999 witnessed the recovery of economies in East Asia. The economic situations of the five most severely hit countries picked up and other economies in this region also improved.

There are many favorable conditions for the economic recovery in East Asia, for instance, the high deposit savings rate, the great attention paid to education, the high degree of openness to foreign capital and technology, the developed trade networks, the huge young labor force and the strong cohesion of the society and so on. These "East Asian characteristics" will greatly increase the potential for development of East Asian economies.

East Asian countries must now make full use of these positive factors to maintain and consolidate economic recovery. The countries need to further adjust their macroeconomic policies, step up adjustment of economic structures, deepen financial and enterprise reforms, increase input in science and technology, improve productivity, perfect the market mechanism and rules and regulations and eliminate corruption. Only in this way can the economic development of East Asia have a brighter future.

One of the profound lessons from this financial crisis is that the recovery and development of East Asian economies require not only the persistent promotion of reforms and economic structural adjustment, but also further strengthening of coordination and cooperation.

Cooperation between China and East Asia began a long time ago and this cooperation has withstood the trials of the crisis.

China has close economic links with various East Asian countries and regions. After the crisis, the Chinese government adopted measures to stabilize the economy and to overcome the crisis, which included efforts to provide aid to the most seriously hit countries through the International Monetary Fund framework and bilateral channels. The Chinese government also promised to keep the exchange rate of its currency, the renminbi, stable; the currency has not devalued during more than two years.

Of course, we have paid a heavy price for it. To promote economic development, we have formulated active financial measures to increase the issuance of national debt and to stimulate domestic demand. China also continues to expand and deepen reforms, particularly of the financial system, which will raise the ability to guard against more financial risks.

The policies of the Chinese government to stabilize its currency's exchange rate and to stimulate domestic economic growth have paid off. This fully demonstrates the highly responsible attitude of the Chinese government toward this crisis and its sincerity to cooperate closely with East Asian countries.

A developed China has also proved to be beneficial to the East Asian region and to the world at large. Some people have expressed their concern about a developed and strong China, and others with ulterior motives have spread the theory of "the China threat " -- which the government has repeatedly denied.

China sincerely hopes and will make unremitting efforts to strengthen cooperation with other countries, in which the strengthening of cooperation with East Asian countries is a focal point in China's foreign relations.

The primary task for cooperation in East Asia is to further create a peaceful environment for smooth economic development. We should strengthen cooperation in trade, finance, investment and science and technology and in the financial field.

Leaders of 13 East Asian countries held an informal summit meeting in Manila last November, the third of its kind and the first in which a joint statement was issued. They have reached many common understandings on strengthening cooperation. Efforts are needed to consolidate this cooperation mechanism and to implement concrete economic projects. Cooperation in East Asia complements other cooperation in the world and in the Asia- Pacific region.

There are 10 countries in ASEAN that are close neighbors of China which are important in China's diplomatic strategies.

China and ASEAN countries are all Asian developing countries, sharing a common cultural background and a strong sense of identification, and holding similar views on the idea of values, human rights, democracy and on many international affairs.

China and ASEAN countries can complement each other in natural resources, technology and capital and human resources. In recent years, ASEAN has become the fifth largest trading partner of China and there is a great potential for further expansion of trade. There is indeed competition in the export market and products, but there are more opportunities for economic cooperation.

In recent years, China and ASEAN countries have established many channels for exchange and cooperation, including mutual visits by head of states, dialogs between foreign ministers, consultations between high-ranking officials, the ASEAN Regional Forum (ARF), non-governmental contacts and so on.

Mechanisms such as China-ASEAN Cooperation Committee, China- ASEAN Scientific Committee, ASEAN Beijing Committee, etc. have been established. At the end of 1997, a good neighborly and mutual trust partnership was set up between the two sides.

Such a cooperative relationship is not only in the interests of the two sides but also conducive to peace, development and stability in the Asia-Pacific region.

The writer is president of the Chinese Academy of Social Sciences and a member of the political bureau of the Central Committee of the Communist Party of China.